Friday, May 5, 2017

Should Taxpayers Be Fleeced Forever Because of the Deficit?

Should Taxpayers Be Fleeced Forever Because of the Deficit?

As anyone could have predicted, after President Trump released his tax proposal last week the response from the left was a familiar one about "tax cuts we can't afford" and "mountains of debt" that will supposedly result from reduced penalties placed on work, investment, corporate profits, and of course, death.

So while the left acted as expected, the truly unfortunate part of this story is that Republicans and conservatives responded to the criticism of Trump's proposal in a similarly predictable fashion.

The Ongoing Debate

The Republicans said what they always say, that tax cuts will author booming growth and will lead to higher federal revenues. This included Treasury Secretary Steven Mnuchin who, as if coached by GOP automatons, responded that the "tax plan will pay for itself with economic growth."

And then, right on cue, deficit scolds from the Republican side of the aisle, including Douglas Holtz-Eakin, expressed skepticism that the proposed cuts would raise "$2 trillion in revenue." Meanwhile, Greg Mankiw questioned the GOP math, telling the New York Times that according to accepted wisdom only "one-third of the cost of tax cuts is recouped via faster economic growth."

With the tax cut debate, nothing ever changes.

Focus on the Spending

Lost on many Republicans is that the moment they start talking about revenues they concede the taxation argument to the Democrats. And this is true even though their oft-stated statistics are correct.

As the 1920s, 1960s, 1980s, late 1990s (capital gains cuts in '97), and 2003 (income, capital gains cuts) reveal rather clearly, reduced penalties on work and investment lead to more taxable economic activity that leads to higher federal revenues. Ok, but federal revenues are not the point, and tax cuts are certainly not a "cost."

When Republicans talk about how much the treasury will collect they concede to the Democrats that we have a revenue problem that requires a taxation answer, as opposed to one of too much spending. Sorry, but government spends too much. It's as simple as that.

Seemingly forgotten by Republicans and conservatives long ago is that with government spending, it's not their money. In that very real sense, all government spending is deficit spending.

For governments to spend, they must tax or borrow precious resources from the private sector only to hand them over to Paul Ryan, Nancy Pelosi and Donald Trump, rather than intrepid investors putting more capital to work, or allowing those who earned the money to actually keep it.

Reducing all of this to what's basic, what would voters prefer? A balanced budget annually of $4 trillion, or $1 trillion in annual deficits based on $1.5 trillion in spending? This is not a trick question. It's easy.

The spending is the problem.

Deficits Don’t Really Matter

At least when governments borrow on our backs they're paying for the right to waste resources we produce. So if the economy-sapping waste is going to happen, better for government to pay interest back to investors rather than simply confiscate the wealth with taxes.

To state, what should be obvious is that budget deficits really don't matter. No one is forcing investors or central banks to buy debt that is only attractive insofar as productive Americans are being fleeced.

Republicans and conservatives who focus on deficits are wasting brain space on what is an accounting abstraction.They need to tape a note to their mirrors, reminding themselves that when politicians spend at the expense of the people’s freedom—and to the detriment of experimentation in healthcare advances, transportation advances, and technological innovation that would render WiFi an antique—they're being wasteful with our money.

When governments spend, we the taxpayers naturally have less to spend, and of even greater importance, less to save and invest.

Real Cuts; Less Rhetoric

Considering all of the above, Republicans invariably miss that it's a very good thing when governments collect less revenue. Indeed, that should be the goal of tax cuts; to reduce the amount that the treasury takes in each year.

Politicians can only waste precious resources insofar as we allow them to, so if Republicans want to live up to their lofty rhetoric about freedom, they should talk about tax cuts that reduce revenues as a feature of tax reform, not a bug.

The above also speaks to another problem tied to the Republican approach to reduced taxation: They justify their actions by saying that economic growth will be the result. It's fair to say that when work and investment are less restricted, we gain greater access to both. These arguments are true, but so what?

Republicans should be for tax cuts even if they were proven to stagger economic growth because the core argument should always be about freedom. It's through hard work that Americans express themselves and the fruits of their labor should not be taken from them without consent.

Of course, there are always the deficit scolds who talk ad infinitum about "budget shortfalls," debt as "far as the eye can see," and "unfunded liabilities" that will soon enough, even making the most laughable prediction, "Make America Greece."

As much as the left confidently predicts global doom if we don't do anything about an allegedly warming planet, so do the misguided "deficit hawks" on the right regularly inform us that America is doomed to follow in Greece’s footsteps if we don't reduce the deficits. This silly argument fails in two ways.

First, a focus on deficits once again places the taxation and spending argument squarely on the turf of the left. They'll gladly discuss what isn't a revenue problem as though it is.

But the bigger problem with this mindless argument concerns something economists bereft of market knowledge seemingly miss all the time: rising revenues are what enable ever-growing federal "deficits."

The paradoxical truth missed by a right blinded by false balance is that real-world investors are always willing to buy debt that is backed by ever-increasing wealth creation and produced by the most productive people on earth.

Of course that's why actual tax cuts large enough to reduce federal revenues would be so wondrous for the confused hawks. When revenues into the treasury decrease, and continue decreasing, so will the relative willingness of investors to buy treasury debt. A benefit of the latter will be that the deficit hawks, who've been predicting doom for decades, will finally (one can hope) disappear into their campus and think tank cubicles never to be heard from again.

The main point is, of course, that taxes are way too high. Taxes should ideally be so low that federal revenues plummet. Wouldn’t it be a nice change to see Republicans promote tax relief that penalizes American workers less while also reining in politicians?

One can dream, but if history has proven itself to be any sort of indicator, Republicans are set to resume yet another debate about growth and revenues that will hand the terms of the debate over to the left on a silver platter. For all politicians, regardless of party alliance, freedom is always an afterthought.

John Tamny is a Forbes contributor, editor of RealClearMarkets, a senior fellow in economics at Reason, and a senior economic adviser to Toreador Research & Trading. He’s the author of the 2016 book Who Needs the Fed? (Encounter), along with Popular Economics (Regnery Publishing, 2015).